New Delhi: India Ratings, a unit of global credit rating agency Fitch, has downwardly revised India’s GDP growth forecast from an earlier estimate of 7.6% to 7-7.2%, a downward revision of 40 to 60 basis points on Wednesday, primarily on account of changing geo-political situation due to Russia-Ukraine war that started on February 24 and has shown no signs of abating so far.
The rating agency says its economic outlook for FY 2022-23 (April-March 2023 period) is unlikely to hold true due to the changed geopolitical situation. India Ratings said since the duration of the Russia-Ukraine conflict continues to be uncertain, the agency has created two scenarios with respect to the economic outlook for the next financial year on the basis of certain assumptions.
In the first scenario, the agency assumes that the crude oil price will remain high for a period of three months, while in the second scenario, it is believed that the crude price will remain high for a period of six months, and in both the cases, the half cost would be passed through to the domestic economy.
In the first situation, the agency believes that India’s year-on-year GDP growth rate would be 7.2% and in the second situation, the growth will further come down to 7%.
Sluggish Private Consumption
The biggest component of India’s GDP, the private consumption as measured by private final consumption expenditure (PFCE) has been subdued in the current financial year despite sales of select consumer durables showing some signs of revival during the festive season.
The Reserve Bank of India’s (RBI) Consumer Confidence Survey for January this year shows that the Current Situation Index increased marginally on the back of better sentiments with respect to the general economic situation but it continues to be in the pessimistic zone.
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The Expectations Index, which captures the outlook for the next year, moderated due to the surge in COVID-19 infection cases in January this year. Household sentiments on non-essential and discretionary spending continue to be subdued.
“As the consumer sentiment is likely to witness a further dent due to the Russia-Ukraine conflict leading to rising commodity prices and consumer inflation, Ind-Ra expects PFCE to grow at 8.1% and 8.0% in Scenario 1 and 2, respectively, in FY23, as against its earlier projection of 9.4%,” the rating agency said in a statement sent to ETV Bharat.
Weak private investment
The Indian economy is not constrained just because of sluggish private consumption, but the second biggest component in the GDP growth from the demand side, the gross fixed capita formation (GFCF), which accounts for over 27% of the country's, has been weak for several years.
Private capital expenditure by large corporates, which has been down and out over the past several years, had shown some promise lately in view of the roll-out of the Production-linked Incentive Scheme and increased manufacturing sector capacity utilization driven by higher exports but the rating agency believes that it will be further hit by the Russia-Ukraine war.
“India Ratings expects the surge in commodity prices and disruptions in the global supply chain caused by the Russia-Ukraine conflict to take a toll on their sentiments and there is a likelihood that this CAPEX may get deferred till more clarity emerges with respect to the conflict,” said the agency.
On the other hand, the government’s capital expenditure is unlikely to be impacted by the war.
In its note, the agency said the government has been showing its resolve to do the heavy lifting by scaling up the CAPEX to GDP ratio for FY22 to 2.6% as per the revised estimate from the budgeted 2.5 and budgeting the CAPEX at 2.9% of GDP for FY23.
India Ratings said that it believes that the overall GFCF growth will not be impacted much and it will grow at 8.8% both in the first and second scenario for the next fiscal, 10 basis points higher than January 2022 forecast.
Retail inflation
In its assessment, the agency believes that a 10 percent year-on-year increase in petroleum product prices without factoring in currency depreciation is expected to push up Consumer Price Index inflation by 42 basis points and Wholesale Price Index inflation by more than one percent.
Similarly, a 10% year-on-year increase in sunflower oil without factoring in currency depreciation is expected to push Consumer Price Index inflation by more than 12 basis points and Wholesale Price Index inflation by nearly 2.5 basis points.
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Both these events could increase the retail and wholesale inflation by 55 basis points and 109 basis points, respectively.
Retail prices of petrol and diesel which were on hold since early-November 2021, have begun to inch up from this month almost on a daily basis.
India Ratings said retail inflation is likely to average at around 5.8% and 6.2% in the next fiscal as per the two scenarios as against its earlier forecast of 4.8%.
“Due to a higher import bill for items such as mineral fuels and oils, gems & jewelry, edible oils, and fertilizers, India Ratings expects the current account deficit to come in at 2.8% of GDP under the first scenario and at 3.2% of GDP under the second scenario as against its earlier projection of 2.3% of GDP,” said the agency.
An estimate by the agency suggests that a $5 per barrel increase in crude oil prices will translate into a $6.6 billion increase in the current account deficit.
